A model of creative destruction with undiversifiable risk and optimising households

This paper studies optimal household behaviour in a model of creative destr uction. The saving technology is characterised by stochastic returns that f ollow a Poisson process. It is shown that equilibrium conditions with optim ising households differ substantially from equilibrium conditions where inv estment in R&D is determined bl;firms. Three out of four market failures di sappear and a new market failure resulting from a complementarity in financ ing R&D is identified. Studying the social optimum shows that it contains a s the special case of risk neutrality the social optimum derived in the lit erature.